Finkel Review Review

Posted by Andrea Leong on June 16, 2017

The NSW Science Party made a submission to the Finkel Review into the future security of the National Electricity Market earlier this year. In this blog post, Tom Geiser—lead author of the submission and energy industry professional—unpacks some of the major outcomes of the review.

By Tom Geiser

The Finkel Review into the National Energy Market just came out with a Blueprint for the Future (via The Department of the Environment and Energy, 1.8 MB).

OK, so that sounds pretty great but what does it really mean?

Let's go through some of the recommendations and tease apart the context for Australians.

Firstly, it's worth noting that this is a political statement, not an exploration of the best way to build an energy industry. The report was commissioned by COAG so you should read the results through that lens; i.e. "How do we avoid pissing off voters and stay in government?" Because of the broad range of governments at the table the outcomes are compromised. They represent the lowest requirements for government to meet.

The near-unanimous message in the submissions from consumer groups, business lobbyists, energy players, and government agencies called for:

"Reform of Australia's energy systems and markets to ensure reliability and affordability as we decarbonise the energy system.

It was refreshing to see the responses from all these groups united in clarity that Australian politicians at all levels had created these problems. The review echoes these responses but it is compromised by what can actually be legislated by the Liberal/National Party coalition (LNP). It recommends to do the bare minimum for emissions reduction in line with Australia's commitment under the 2016 Paris Accord, to placate the climate deniers while leaving the door open for more action from the states and territories. The review also highlights that the cost of doing nothing is higher than any emissions reduction policy, effectively forcing Turnbull to commit to something, and soon.

The pillars of the review: orderly transition,system planing, and stronger governance (graphic source).

I'll provide some context and commentary on specific recommendations but some of them are pretty straightforward or dry so I'll skip them for brevity.

1. Preparing for next summer

There are supply issues in the NEM currently because the brown coal-powered Hazelwood Power Station shut down with little notice (see point 3.2), and three-quarters of our natural gas is being shipped overseas due to poorly designed contracts. AEMO should be preparing for meeting 2017/18 summer demand right now.

2. Increased security

2.4 Black start equipment needs better testing and coordination

This refers to getting customers back to normal electricity supply after a blackout. After the SA blackout in December 2016, several of these services failed to deliver meaning the main power plants could not be restarted and customers remained in the dark for hours longer than necessary.

2.3 Tightening frequency bands

Australian standards for fossil generators are pretty loose when it comes to frequency regulation (compared with other countries). Over time generators have been punished by the regulator for keeping the default machine settings which are tighter. This of course incentivised them to cut or loosen standards leaving the network less resilient.

2.1/2.2 New generators need to provide Fast Frequency Response (FFR) and inertia but there shouldn't be a market to reward them

These are super fast ancillary services that arrest a frequency deviation e.g. when a large coal plant trips offline. They limit how much frequency changes by so that the system doesn't completely de-synchronise, but slower services are needed to return to normal frequency.

This is an interesting one because no technology can currently provide both services. Conventional generators are too slow to provide FFR and renewables don't intrinsically provide inertia. Generators could bolt on some batteries to provide FFR and buy a synchronous condenser to provide inertia but that adds to the capital cost for new generators.

As long as the connection standards aren't too onerous this isn't a big issue but I question whether it's the most efficient way to procure these services. Imagine the standard is too high and we build more of these services than we need, or the standard is too low and we don't have enough of them. The Australian Energy Market Commission (AEMC) suggested transitioning to a market for these services which essentially means renewables would pay for the ongoing cost rather than the upfront cost.

Texas did something similar to the recommendation by requiring all existing and new generators to provide frequency regulation. They have far more of this service than they really need and some old gas and wind plants were forced to retire because they couldn't comply. For Texas it wasn't so bad because it wasn't particularly costly to upgrade the old power plants that could do so. They are also equipped for periods of really high renewable penetration because wind and solar are forced to provide ancillary services to maintain system security. At the end of the day I'm willing to give up efficiency and my free market fetishism to just get the job done and be ready for future problems.

Australia has lots of rooftop solar and it's growing at about 1,000 MW per year. Making sure these systems and future batteries can support rather than burden local networks is key for letting consumers continue to install more and more of them.

2.6 Start collecting data from distributed energy systems

You can't control what you don't measure. We need better visibility and communication with distributed sources. Rooftop solar in aggregate is Australia's biggest generator and we have basically no oversight of what it's up to.

2.9 Permanent budget allocation for grid innovation trials

Definitely a smart idea. Australian networks and researchers are coming up with some great solutions but there's no coordination and funding has no continuity.

2.12 Assess future workforce requirements

Finkel states that we will need more people with STEM skills to keep up to date with emerging technology. In particular: power systems engineers, software developers, data scientists, and security experts. No arguments here.

3. A reliable and low emissions future – the need for an orderly transition

3.2 COAG should agree to an emissions reduction trajectory and implement a Clean Energy Target (CET) rather than an Emissions Intensity Scheme (EIS)

The trajectory stated is our Paris target—a 28% reduction in emissions by 2030, compared to 2005 levels—which is very weak. The current Renewable Energy Target (RET) has basically covered most of what we need to do to hit the Paris target. In the Finkel Report there's little difference between business-as-usual and any other proposed emission reduction scheme because the trajectory barely pushes us beyond where we'll be in 2020.

The choice of a CET over an EIS is also purely politics. Finkel states that it's the cheapest option but it's almost the same cost as business-as-usual or an EIS. In fact, the uncertainty in the modelling is much larger than the difference between scenarios. However Turnbull already ruled out an EIS because it's reminiscent of a carbon tax. This is despite near-unanimous support for an EIS from the community, business, industry and government groups mentioned earlier. The reason for this strong support is that an EIS keeps the program costs internal to generators. An equilibrium between existing and new generators of all types can be quickly and continuously established with minimal impact on customers' bills.

The CET suffers from the problems that the RET has. Costs are indirectly borne by customers because no revenue is raised from polluters. The retailers also have limited interest in getting the best deal for customers because if the market changes they'll be out of pocket or their customers will leave them. For the RET this disconnect coupled with regular threats to change policy meant that the market bounced between under- and oversupply, with customers sometimes paying too much and investors losing their hair.

The benefits of a CET over a RET from the perspective of the LNP is that gas can meaningfully compete and coal is not directly pushed from the market.

Finkel notes that flexibility and long term certainty are the keys to getting effective and low cost emissions reductions:

"…the Panel is hesitant to argue definitively that one mechanism, between the EIS and the CET, is superior to the other. The differences in theory may be less significant than how well the chosen scheme is implemented and aspects of its detailed design, such as a predictable process for parameter changes and a robust and proportionate compliance and enforcement regime."

The report reiterates the point by highlighting this quote from the Australian Energy Council:

"The cost of sustained policy inaction is now higher than the cost of efficient and durable policy action."

The Greens and various climate deniers are already complaining that the CET is too weak and too ambitious respectively so I wouldn't be surprised if political instability plagues whatever policy might be legislated.

Thankfully Finkel leaves options for the states to do more. Victoria and Queensland have started the process of implementing renewable targets and NSW is likely to follow suit. So far VIC and QLD procured cheap wind and solar projects through auctions similar to the ACT's successful program.

There's also a recommendation to require all large generators to provide three years notice prior to closure. Several coal generators have shut down with minimal notice which has meant delays before new capacity could come online. In practice enacting this recommendation probably won't do much; a generator that is too expensive to run or in need of major refurbishment has no obligation to run even after giving three years notice. In some ways it's better to have certainty that the generator is off rather than waiting for it to suddenly fail.

3.3 Generator Reliability Obligation

This point basically recommends that renewable energy generators should have to install batteries to ensure adequate dispatchability. On the face of it, this is not a terrible idea but it's possible that renewables will be held to a higher standard than coal and gas. Quite a few fossil power stations only have a few hours of fuel stockpiled so requiring more than that would be overkill and a distortion of the market. It's also worth pointing out that the biggest contingency risk is not the variability in weather but a large coal plant tripping offline. The AEMC and AEMO are supposed to be tasked with implementing this recommendation and I'm confident they can develop something fair and achievable.

4. More efficient gas markets

This recommendation advises more transparency in gas supply and contracting, and that AEMO should have more power to maintain reliable supply. Fair enough.

5. Improved system planning

National oversight rather than state based planning—great. There are also recommendations to value several community or system benefits that aren't accounted for in the current regulatory process. These recommendations should result in better connections between states which is good for both resilience and reducing price volatility.

5.1 Develop a plan to facilitate the efficient development and connection of renewable energy zones across the NEM.

This is another initiative borrowed from Texas, which had a very successful process for developing transmission. New transmission lines were auctioned off to renewable proponents, and whoever paid the most got first right to connect. Any lines that weren't cost effective were abandoned.

The main backbone of the NEM is pretty weak with strong connections only between the state capitals and the closest coal basin. It's common for storms or bushfires to limit flow around regions and there's limited redundancy if something goes wrong. More transmission would increase trade between states, improve redundancy, and unlock renewable resources away from populated areas.

6. Rewarding Consumers

This section recommends making things easier for customers; from making better choices, extracting value from personal data, not overspending on infrastructure, rewarding participation in the market and rolling out programs so low income households can access energy efficiency, solar and batteries.

Part of the reason that consumers currently get a bad deal is because of the disconnect between customers (demand) and supply. I think more weight should have been put on cost reflective tariffs rather than piecemeal programs as they align customer incentives to the NEM as a whole.

7. Stronger Governance

More oversight and control for COAG, with regular reviews of system performance and emerging risks. It probably wouldn't be bad for COAG to check up on the state of the energy market more frequently than every 15 years. That said I'm wary of having politicians having an opening to give idiotic directions. The governing bodies in energy are non-partisan and have long term views on energy market outcomes.

Summary

On the whole it's good that our governments got a kick up the behind. We need to take action right now to start fixing things and we need policy that lasts longer than an election cycle. However, I'm sceptical that emissions reduction policy won't continue to be a vehicle for political point scoring. Hopefully the states and Australian households continue the rollout of renewable energy in spite of Canberra.

Finally, rewarding consumer participation is ever more important given that they can realistically leave the grid these days. Without oversight and coordination of solar, batteries and electric cars, costs are likely to increase for consumers. It would be a terrible outcome if people left the grid and capital costs were borne by fewer customers.

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